Markets Rise And Stabilise
It was a collective sigh of relief as markets gained on Monday, following record highs on Wall Street over the weekend
On Episode 410 of The Core Report, financial journalist Govindraj Ethiraj talks to Amit Pabari, founder and managing director at CR Forex as well as Tarun Pathak, director of Counterpoint Research.
SHOW NOTES
(00:00) The Take
(04:31) Markets rise and stabilise
(05:34) The rupee hits a lifetime low. Why is the RBI not defending it?
Retail inflation jumps to highest level at 5.49% in 2024, WPI follows
What are mobile phone sales trends telling us about consumer behaviour?
Nobel prize in economics goes to academic work on inequality between nations
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday, the 15th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
When Hyundai launched its first small car the Santro 26 years ago, people stopped on the road and had a hearty laugh at the 'tall boy’ shape of the car.
It used to look unusual or even bizarre for those times.
There is nothing unusual or joke worthy about Hyundai’s mega IPO that opens today but the size and timing could be a little worrisome.
Hyundai Motor India is launching a roughly Rs 28,000 crore initial public offer on October 15, the largest ever in India’s IPO history.
The price band is Rs 1,865-1,960 per share and will cross LIC's initial share sale of Rs 21,000 crore, being the last biggest one.
Hyundai’s IPO is a first for other reasons as well.
It’s the first car company to go IPO after Maruti Suzuki in 2003.
Second, it's a multinational listing in the domestic market and there have not been too many in recent decades.
That is a good sign of faith in domestic markets, both the consumer as well as investor. Not all MNCs go down this twin route.
And of course it's an IPO from the east, most listed subsidiaries of MNCs in India hail from Europe or North America.
What are the concerns ?
Well, large IPOs can suck out more liquidity than there is and kill appetite for some time.
Moreover, large IPOs have also coincided with market peaks, even though there may not have been a direct correlation.
On the other hand of course is the price, which is quite tightly valued according to analysts.
Which also means there is not much upside.
Another concern is that the money being raised is going to the parent company and not into Hyundai Motor India.
Let's come back to size.
A report in the Economic Times says that of the 6 mega IPOs worth at least Rs 10,000 crore seen on Dalal Street so far, 5 of them gave negative returns on listing.
Not just that, IPO investors who have held on to the stock in hopes of a turnaround are still sitting on losses, according to data from Prime Database.
The rogues gallery includes companies like PayTM and New India Assurance among others.
The one IPO that did and has done well is Coal India.
The only message I can take away from that is there is a bigger fortune under the ground than over it.
And not to mention that if it is Government owned then that could be a bonus.
But then Hyundai’s vehicles ply above ground.
On the flip side, the financials are strong with sales of close to Rs 70,000 crore last year with profits of Rs 6,000 crore.
So this is no deep in losses tech company selling a future dream, rather a tested product firm who has been selling cars in India for close to three decades and exporting them from its world class factories in Tamil Nadu.
Hyundai’s margins and price to earnings at this point run close to Maruti so you can see where and how it is pitched.
The Koreans versus the Japanese on Indian soil.
Hyundai’s margins are a little better because most of its portfolio is the higher margin SUVs.
Abhishek Gaoshinde, an analyst I spoke to from Sharekhan by BNP Paribas says the Hyundai IPO is an opportunity to buy a MNC and a passenger vehicle stock given that Maruti Suzuki is the only pure play car stock - Mahindra and Mahindra and Tatas financials also reflect their tractor and commercial vehicle businesses.
He also argues that Hyundai India does not need any money as such because it is generating healthy cash so the funds going to the parent is not really an issue.
The arguments for and against seem evenly matched though the ones for are based more on fundamentals while those against, more on sentiment.
It will be interesting to see what scores in the next few days.
Maybe Hyundai will deliver another Santro, something people laugh at in the beginning but then embrace over time.
Top stories and themes..
Markets rise and stabilise
Retail inflation jumps to highest level at 5.49% in 2024, WPI follows
The rupee hits a lifetime low. Why is the RBI not defending it ?
Nobel prize in economics goes to academic work on inequality between nations
What are mobile phone sales trends telling us about consumer behaviour?
Markets
It was a collective sigh of relief as markets gained on Monday, following, among other things, record highs on Wall Street over the weekend.
Interestingly, financial stocks did well in India as they did on Wall Street’s latest run.
The 30-share Sensex rose 591.69 points to settle at 81,973.05 while the NSE Nifty50 ended higher by 163.70 points or 0.66 per cent at 25,127.95.
The big event for today as we have discussed is the Hyundai IPO.
Reuters quoted LSEG data to say some 260 companies have raised more than $9 billion so far in 2024 through IPOs and the year-to-date volume has already surpassed the $7.42 billion total raised last year.
Interestingly, Hyundai’s IPO will also be the second largest IPO globally this year in terms of money raised, following a logistics company called Lineage Inc's $5.1 billion U.S. IPO in July.
Hyundai is India's second-largest automaker after Maruti.
Rupee Hits Lifetime Low
The Indian rupee dropped to an all-time low on Monday, thanks to persistent dollar demand from foreign banks, said Reuters
The rupee fell to a lifetime low of 84.07 to the U.S. dollar, crossing the prior low of 84.07 hit on Friday.
The rupee had spent close to 8 months near the 84 mark but not breached it, thanks to frequent interventions by the Reserve Bank of India (RBI).
The rupee has faced considerable pressure thanks to foreign investors pulling out about $8 billion over the last 10 sessions.
On Monday, the weakness in Asian peers amid disappointment over China stimulus also weighed on the rupee, traders said.
The dollar-rupee pair is likely to hover in a "83.95-84.20 range in the near-term (and) remains a sell on uptick if it moves fast", one trader told Reuters.
Where could the rupee go now ?
I spoke with Amit Pabari, Managing Director, CR Forex and began by asking him what had changed.
INTERVIEW TRANSCRIPT
Amit Pabari: So there are three reasons why rupee was able to cross the 84 key mark. The first reason was FII have been able to sell in Indian equity and debt market close to 6.5 billion in the month of October. Second reason was oil prices which were very stable in the month of September.
In the month of October the price went up by 10% which was adding pressure on our current account deficit. Final point was if you see the entire emerging market currencies, you will see that dollar which was very stable in the month of September which came down at 100 level. Now from 100 level it has moved to 103 kind of level because of which all emerging market currencies have got weaker.
If you have to compare in terms of percentage, dollar index got weaker by two and a half percent. Other currencies have got weaker more than Indian rupee. So basically we can say that other currencies have also got weaker and we have outperformed them in terms of percentage.
Govindraj Ethiraj: Okay so that's a fair point if you look at it in contrast to other Asian currencies for example. But my question is still the Reserve Bank's own intervention because the Reserve Bank's intervention so far has been to keep the rupee in that very tight range and it was not allowing it to go beyond. So are we also therefore saying that the pressure, the supply pressure was so high or the selling pressure was so high including by the portfolio investors that the Reserve Bank could not do anything about it or could not be strong enough?
Amit Pabari: Rupee touched 83 on 17 October 2022 basically in the month of October 2022 it touched 83. I might not be as accurate with the dates but in the month of October 2022 it broke 83 level. From 83 to 84 it took two years for rupee to touch that level.
Now that one rupee is an interesting point but let me give you one more data point. If I have to book a forward one year export forward or one year import forward the premium percentage is close to two percent. So basically two year premium would come around three and a half four percent and rupee have got much rupee was so stable that forward premiums are much more than the rupee volatility.
So basically we can say that RBI was in full control in managing the volatility of the currency. Now third point when I say that why I think that RBI was able to manage it very well because every time whenever the inflow came they used to buy reserves. Now at 793 billion dollars once upon a time we were 5 now we are the country with the fourth largest reserve.
So basically RBI is in full control and doing a fantastic job as far as managing the currency is concerned.
Govindraj Ethiraj: So you're saying in some ways the market has got spoiled by the fact that the reserve bank was keeping it in that 83 to 84 band and now it's allowing it to go a little bit.
Amit Pabari: Too much of intervention on either side is bad so you know you allowing it gradually to move up or down that is what any venture bank will do they will not try to protect a level they will try to you know maintain the volatility which I think they have been able to do it fairly well.
Govindraj Ethiraj: Right and Amit as you look ahead next few months and all the factors that you talked about including the volatility in oil and currency of course is still there or going to be there so how is it looking?
Amit Pabari: If you have an interesting observation if we have to predict the view of dollar rupee pair the first thing what we all see is where is dollar heading or how is US economy is going to do. If you see the dollar index which is currently trading at 103 and upper level we think that dollar index is going to come down towards 100 and in the year of 2025 dollar index is going to break that level of 100 and probably move towards 97 to 95 kind of level. Now the reason why we say this the dollar is going to get weaker one of the most important problem what US economy is facing currently is its rising debt level.
Now whichever party is going to come you know winning the election vote will be taking steps which is going to increase their fiscal deficit and which is going to increase their debt and if the debt continues to increase at this level then definitely dollar is going to get weaker 25-30 percent of what US is earning that is they are spending on the interest expense. So these are main problems if dollar gets weaker then broadly all Asian currencies are going to get stronger that is one objective. Second interesting data point is we have close to 85 billion trade deficit with China.
Now currently CNY INR is trading close to 11.90. If dollar gets weaker and this Chinese currency gets stronger and RBI allows rupee to move higher towards say 84.5-85 kind of a level it will have an adverse impact on our trade deficit with China. Because of this reason we feel that 84.25 to 84.30 will be a strong resistance for the rupee and rupee should ideally move back towards 83.80 and 83.5 kind of level in couple of months time.
Govindraj Ethiraj: That's very specific. Thank you so much Amit for your time.
Amit Pabari: Pleasure is mine.
Goldman Lifts China forecasts
China continues to gain in the eyes of investment banks.
Goldman Sachs Group has upgraded forecasts for China’s economic growth in 2024 and 2025 after Beijing unveiled a series of measures to shore up growth, including plans for greater public spending announced over the weekend, Bloomberg reported.
The bank expects China’s gross domestic product to expand 4.9% this year, up from 4.7% previously.
It also lifted its growth prediction for next year to 4.7% from 4.3%, according to a report dated Sunday.
“The latest round of China stimulus clearly indicates that policymakers have made a turn on cyclical policy management and increased their focus on the economy,” Goldman economists including Hui Shan and Lisheng Wang wrote.
Finance Minister Lan Fan said 2.3 trillion yuan ($325 billion) of local government special bond funds will be used in the fourth quarter, suggesting a more “back-loaded” public spending schedule and a bigger growth rebound than the bank previously anticipated, according to Goldman’s report.
In further action to allay concerns about the economy, officials on Monday promised to ramp up pro-business policies, including unspecified measures to foster “unicorn” start-ups valued at over $1 billion.
Interestingly, China’s market regulator also vowed to crack down on officials collecting excessive fines to shore up falling income.
These steps appear intent on improving sentiment in the private sector, which accounts for more than 80% of urban jobs but has seen its profits squeezed by the slowing economy and falling prices.
However, Goldman warned that China’s structural challenges remain and maintained its forecasts for 2026 and beyond.
Inflation Up On Food
A sharp rise in food prices and an unfavourable base effect pushed up retail inflation to its highest level in 2024 in the month of September.
Data released by the National Statistical Office (NSO) on Monday showed that India's consumer price index (CPI)-based headline retail inflation figure increased sharply to 5.49 per cent in September from 3.65 per cent in August.
Earlier in December 2023, retail inflation had stood at 5.69 per cent.
Food inflation is reaching out of control territory again, rising to 9.2 per cent in September from 5.66 per cent in the preceding month.
The jump was thanks to an acceleration in the prices of fruits (7.65 per cent) and vegetables (35.99 per cent).
Meanwhile, the prices of cereals (6.84 per cent) and protein-rich items like eggs (6.31 per cent) and meat and fish (2.66 per cent) decelerated during the month.
Earlier in the day, India's wholesale price index based inflation rose to 1.84% in September on the back of higher food prices.
The September print was lower than the 1.92% increase projected by economists in a Reuters poll and up from 1.31% in August, according to government data released on Monday.
BOB Research analysts said the higher WPI number was
of a 2.2% increase. This was driven by acceleration in food inflation at 9.5% (2 year-high) from 3.3% in
Aug '24 owing to an unfavourable base.
After contacting in Aug’24 (-10%), vegetable inflation climbed up
sharply to a 14-month high of 48.7% in Sep’24. Within vegetables, onion (78.8% in Sep’24 from 65.8%)
and tomato prices (74.5% from -52.6%) soared higher due to untimely and excessive rains.
Mobile Phone Sales, What Are They Telling Us?
India economy watchters like me are also watching the present festival season closely to see the early trends.
Remember, heat waves followed by very heavy monsoons and rains have seemingly disrupted many purchase patterns, for example for cars.
And then because festival seasons have not coincided month on month, there could be some discrepancies in comparison.
Which could get sorted out by the end of this month.
Meanwhile,
What are smartphone sales numbers saying ?
Some 35 million of some 157 million smartphones could get sold in the festive period.
The first wave of India's festive season sales (September 26 to October 7) saw a fall of 3% in smartphone volumes, crossing 13 million units.
However, the value saw an upward trend, growing by 8% YoY and crossing $3.2 billion for the first time.
In the first wave, online channels contributed to almost 70% of total smartphone sales.
Entry-level smartphones faced low demand, dragging down overall performance.
According to Counterpoint Research, revenue grew driven by a 7 per cent rise in premium handset sales priced above Rs 30,000.
This happened apparently as consumer demand in the entry to mid tier smartphone segment was weak and buyers held on to existing devices, thanks to limited options under 10K.
There are some very interesting behavioural patterns though within the festive season itself and the shifts between online and offline purchases and how and when consumers are buying or bought at least so far this year.
I spoke with Tarun Pathak, director of Counterpoint Research and began by asking him to talk about the festival season and what the early data was telling us
INTERVIEW TRANSCRIPT
Tarun Pathak: Very important point actually, if you look at right now, first of all, let us define what exactly, how we are defining the festive season. So a counterpoint defines it as a period of roughly 34-35 days, exactly from the day of when these online sales starts taking off, like Big Billion Day, Amazon, Great India Festival, and the day of Diwali. So that's what we define festive season sales.
So it's roughly like five weeks of festive season. Coming back to your question, so what we are looking at, there are certain categories within consumer electronics that are growing fast. And when we say growing fast, those can be multiple attributes.
So one, they can grow faster on the value terms, or they're growing on the volume terms. Here, if we look at from the smartphone perspective, of course, they have grown in terms of value year on year. But then there are certain other categories that were more or less muted, like for example, auto sales were a bit muted.
Then we are seeing apparels are actually growing much faster than the smartphones that we have seen in the initial trends of the festive season. In fact, the wearables, the headphones, the smaller accessories items that are growing faster year on year. So the uptake rate has been quite strong, what we have observed.
The larger categories, like for example, what we have seen in terms of refrigerators, ACs, those were down a bit in the initial festive season sale because largely, if you look at this time, the festive season starts right in the middle of those Sharaat period, what we observe in Northern India. And I was talking to one of our retailers, and a very interesting conversation that came out. And the retailer was saying that until last year, consumers were still holding on to the purchase of consumer electronics during the Sharaat period.
But this time, they are saying that this is something which is more of a necessity to them. And what they were holding back is something they are going to wear or a larger item like let's say TV, fridge, or anything which is consumer appliance, big ticket item. So that's the narrative that is changing.
In fact, I was just before coming onto the podcast, I was looking into the data on the zonal level. And we thought like month on month, second half of August as compared to second half of September, North region might be declining. But it was exactly the opposite.
North region was actually the month on month growth in terms of your smartphone. So that is a signal that consumer's buying process is changing, thought process is changing. And another item is if you look at what was a big change from the last year was how these devices are being purchased, like EMI has played a big role this time.
And that is why we can discuss this later. But that is why the premium market has grown 7% year on year in our survey as compared to the last year. That is what we have observed.
Govindraj Ethiraj: Right. So if you want to sum up that part, you're saying that consumer behavior is changing. They're not as, let's say, bound to periods like Shraddh when people usually don't make purchases in India.
And therefore, I'm guessing they're going by the deals that they have an offer. And the second, of course, that we've talked about earlier as well is the fact that EMIs are driving more premium phone sales. Is that something that you still see happening at the same level?
Tarun Pathak:Yes, we are still seeing almost like 55-56% of the premium smartphone sales are still happening on EMIs. So that's a big... If we compare it with countries like U.S. or even China, U.S. is different because obviously you have operator market very strong. But if we talk about open markets, this number might be lesser than even 20-25% as compared to India. So India stands anomaly. We have online sales, if I look at on an annual basis, somewhere closer to like 48%.
The next closest market could be somewhere in Europe, which is closer to like 33-34% online. So these two things are happening in a big way in India. And we believe the biggest driver is the youth because youth need something which is the latest and the greatest.
But at the same time, they also want to bridge this affordability factor, which they can do with the help of these EMIs or the financing in one way or another.
Govindraj Ethiraj: And you're saying that the jump in online is sharper compared to previous, let's say festivals or full year or half year?
Tarun Pathak: Yeah, it was like first wave, everyone anticipated like it's going to be all online because the kind of offers, deals they were giving, that was like 40-50% cheaper as compared to the non-offer period. So that was understood. The only thing is the first festive wave, even the entire festive season that I told you, 35 days, we divided into three phases.
First phase is the first wave that we have just seen, 26th September till 7th of October. The second wave has just started, we are in the middle of it, that will go until like 17th or 18th of October. And then the third is until Diwali, which is more offline.
So first is very heavily online dominated, 70% of the sales are online. And then somewhere in the middle, the focus starts shifting more towards offline because as we reach closer to Diwali, there are a lot of impulse purchases that are happening in the offline. So as we move closer to the Diwali period, it will start shifting towards offline.
But the first sale was 70% online as compared to 74% last year it was. So there was a dip because this time, some of the offline players have started matching the offers in online. We have seen a lot of these offline players, they're saying, okay, we are going to match the price that is there on the online.
But then convenience and everything that takes over and a lot of these users went in.
Govindraj Ethiraj: And it averages out to about 50-55% online versus, so it's almost half-half now.
Tarun Pathak: Yeah, last year it was like closer to like 62-63% during this festive season online.
Govindraj Ethiraj: No, what I'm saying is now the overall, the annual averaging out?
Tarun Pathak: Annual averaging out is 48% online, but this year we are expecting 45% online. Offline will grow a bit.
Govindraj Ethiraj: Okay, that's interesting. Last question, Tarun. So how are you looking at your overall projections for the whole year or the rest of the calendar and particularly the last quarter?
Tarun Pathak: We are still estimating 3% year-on-year growth in terms of volume. We still think the Indian smartphone market will reach closer to like 156-157 million out for the entire year. So that's mostly on the volume.
And this is something what CounterPoint has predicted. So we are very similar with our prediction as of now because nothing has changed in a big way. Unless until some brands will sit on inventory after this festive season and the selling declines significantly in November, then we might tweak a bit by one or two million.
But in worst case, it will be flattish.
Govindraj Ethiraj: So 137-140 million?
Tarun Pathak: 157 million is what we are estimating.
Govindraj Ethiraj: Sorry, 157 million smartphones. And feature phones?
Tarun Pathak: Feature phones closer to 60 million. That will be down from like, it will be closer to like 55-56 million. That will be down from 60 million last year.
Govindraj Ethiraj: Right. Tarun, thank you so much for joining me.
Tarun Pathak: Yeah, thanks. Thanks a lot.
The Nobel Prize In Economics Goes To…
U.S.-based economists Daron Acemoglu, Simon Johnson and James Robinson were awarded the Nobel prize in economic sciences on Monday for their work on wealth inequality between nations.
Their work has helped show why societies with “poor rule of law and institutions that exploit the population do not generate growth or change for the better,” the Nobel committee said, demonstrating the “importance of societal institutions for a country’s prosperity.”
Acemoglu and Johnson are professors at the Massachusetts Institute of Technology, while Robinson is director of the University of Chicago’s Pearson Institute for the Study and Resolution of Global Conflicts with a specialism in the economies of sub-Saharan Africa and Latin America.
Acemoglu and Robinson wrote the popular 2012 book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” which explores the roots of inequality and why some countries successfully gain wealth and influence, CNBC reported.
The laureates have “pioneered new approaches, both empirical and theoretical, that have significantly enhanced our understanding of global inequality,” Jakob Svensson, director, and professor of economics at Stockholm University’s Institute for International Economic Studies, said during a press conference.
The question of why the gaps between poor and rich nations are so persistent is not new, but remains “among the most urgent in social sciences,” he added.
